To Franchise, or Not To Franchise

Aaron Kennedy was walking home from dinner one night, his stomach full of pad thai, when something dawned on him: Comfort food always seems to involve noodles. Whether it's spaghetti, pork lo mein, or mac and cheese, the masses just can't get enough of them. "People grew up all around the world eating noodles," Kennedy says. "For centuries, this food has been appealing to peasants and aristocrats alike."

And so it was that Noodles & Company--a quick-casual restaurant serving noodle dishes from around the world--was born. In 1995, two years after his post-pad thai epiphany, Kennedy launched his first restaurant in Denver. Since then, the lifelong foodie and former brand manager at Pepsi has opened 79 more "global noodle shops" in nine states, all of them company-owned and operated. Revenue hit $68 million in 2003, up 36% from the previous year.

But Kennedy couldn't help worrying that the company wasn't growing fast enough. With new competitors coming on strong, he was determined to solidify Noodles & Company as the category leader. One way to do that was to alter the company's tried-and-true strategy, and attempt, McDonald's-like, to expand through franchising. But was Kennedy--a CEO who still sits down with patrons to see how they like their mushroom stroganoff--willing to take such a radical step?

From the outset, Noodles & Company "was less about an empire than the ability to serve these great bowls of noodles," says Kennedy, 40. He opened the first restaurant with $73,000 of his own money and another $200,000 from 24 friends and family members. Less than a year later, he launched a second location in Madison, Wis., where he had attended business school. But Kennedy soon learned that it's one thing to whip up a plate of penne in your own kitchen, and something else to serve it--at a profit--to hungry customers in two cities. Initial reviews were negative, criticizing both food and service, and the two restaurants soon began bleeding cash.

So Kennedy scrapped everything, revamping his operation with a $5-a-bowl, saute -to-order menu, better hiring practices, and a new design. Soon, he was operating in the black. Using cash from the now-successful restaurants, and new rounds of financing from his investors, two locations became six, and so on, and by February 2003, Noodles & Company had 60 restaurants in its fleet.

But soon, new competitors appeared. For example, Nothing But Noodles, based in Scottsdale, Ariz., was shooting for hundreds of locations within a few years. Noodles & Company began plotting a response. The company had already met with suitors interested in a buyout or strategic partnership, but could not find a good match on price or philosophy. Perhaps, thought Kennedy, it was time to explore franchising. Would-be franchisees had been knocking on the company's door for years, and a study commissioned by the board of directors found that tactic could help swell the company's ranks to 250 restaurants in less than five years. Best of all, franchisees would be shelling out their own money.

But franchising was also a scary thought. During his tenure at Pepsi, Kennedy had seen firsthand the adversarial relationships between the soft-drink giant and its bottlers. What's more, a brand that took years to build can take on a life of its own in the hands of far-flung franchisees. "My biggest concern was that we would lose control and customers would not have the same experience," Kennedy says. "That would tarnish the whole organization."

The Decision

Franchising would only work, Kennedy decided, if the relationship between headquarters and franchisee was a true partnership, rather than the usual fiefdom. So he and his team set out to create a "new-school way to franchise."

The nuts and bolts are relatively standard: Franchisees pay a $35,000 up-front fee and 5% of their annual revenue. But Noodles & Company is doing other things differently. Franchisees are carefully screened--they are even given psychological tests. In addition to a how-to manual called "The Noodles Brain," all franchisees receive a "Noodles Buddy"--a seasoned corporate manager who serves as a mentor. The company also assists with real estate selection and acquisition, as well as restaurant design and construction. "They won't be successful if we just mail them a binder," Kennedy says.

The company only considers operators who already run several restaurants and are interested in opening 10 or more Noodles & Company locations. The first franchisee, A.O. One--an affiliate of Great Circle Family Foods, the largest Krispy Kreme developer in the nation--signed on for 56 Noodles & Company shops in southern California over the next seven years. "The company places a big emphasis on the people side of the relationship," says Roger Glickman, CEO of A.O. One. "It wanted to understand our culture as an organization and get to know our team. I think that really bodes well for the quality of the system."

Kennedy also is willing to move slowly. Only eight franchises will open in 2004, compared to 20 company-owned stores. That will enable the company to devote sufficient resources and attention to the franchising effort, though Kennedy expects the franchise growth rate to outpace that of his own stores by 2006.

Where will it lead? An eventual IPO is an option, Kennedy says, and the door is still open to strategic partners. Until then, Kennedy plans to keep "bringing the noodles to the people," and in the process, may just end up with a noodle shop on every corner after all. "I think we have thoroughly proven that people love Noodles & Company," he says. "And the hospitality side of me, the hospitality gene, wants to share that even more."

The Experts Weigh In

Don Boroian

Chairman and CEO Francorp, an Olympia Fields, Ill., consulting firm

A lot of companies elect to franchise when they're too small. Very few companies wait as long as Noodles & Company. So what it has done is position itself to attract sophisticated, multiunit franchisees that probably wouldn't have been attracted to the concept before. I really don't see a downside, provided it goes with experienced food-service operators. I think it will find this is an easy transition. If the buying power of the company is passed along to the franchisees, the economics allow them to work as well as company stores. It also helps with visibility in the marketplace, because it gives them more name recognition.

Doug Ducey

These guys need to realize there is a learning curve. The franchising business is different than the business of operating stores. I do think both can be done simultaneously, but you want everyone to think they are part of the same team, the same system. You don't want your franchisees to feel like second-class citizens. If you give the franchisees some room, they bring a lot of entrepreneurial juice to the company. Help them understand that. If they bring a good idea, you need to let them know it's a good idea, apply it, and shout it from the roof.

Robert T. Justis

Director International Franchise Forum, Louisiana State University

It is fantastic that Noodles & Company has 78 stores. It's worked out the bugs, knows the business. But franchising is a different ball game. Can you replicate your food with outside owners? How much territory are you going to grant franchisees? Can franchisees change menu items? The problem that new franchisers run into is that they treat their franchisees as managers, not owners. That can become very difficult for the company. They need to receive feedback from the stores. They need to reach out to their franchisees, on at least a monthly basis.